Renaissance Asset Management

Macro Musings – January 2019

Give an aged bull market a chance BEN GRIFFITHS It seems a number of respected commentators have decided a bear market in equities is upon us. Perhaps this is so, but for now, this house is going to give the aged bull market the benefit of the doubt. We explain our reasoning here, and outline 3 new stocks we have taken positions in. The history of secular bull markets highlights that year 9 in the advance is frequently problematic for investors, via heightened volatility, ahead of a resumption of the primary trend. The 2018 episode resulted in a US stockmarket valuation reset of ~ 3 PE points, reputedly the 3rd most aggressive in 40 years. A PE rating of ~15.8 x better reflects the somewhat slower growth outlook moving forward. Market noise is at an elevated pitch right now with a Government shutdown, a trade impasse, imminent recession, a fitful FOMC and slowing eps momentum. Since December 26, the US market has deftly climbed the proverbial wall of worry, with the S&P500 rallying ~13% and small caps higher by 17%. The VIX (measure of fear/volatility) now sits at 19, having spiked to 36. This suggests calm. Credit conditions (expressed through investment grade and high yield spreads) are once again normal and valuations (absolute and relative to bonds) range from reasonable to highly appealing, on the basis that forward earnings estimates are not overstated. Regular readers will be familiar with my use of Equity risk premiums – ~4.8% in the US and ~ 8% in Australia. These are a long way from derailing the case for equities. They will be intrigued to learn that I recently happened upon an old investment curio-the Rule of 20. Popular through the ages (valid signals since the early 1960’s) and now all but abandoned. The rule of 20 is a basic industrial stock investment yardstick summing the Industrials PE with the CPI. < 16.5 = BUY and > 21 = SELL. Today that measure sits at around 17.5.
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